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Can Proposed Reductions in Future War-Related Spending Be Used To Offset Proposed Deficit Increases in Other Areas?

February 1, 2012

We have received many questions about whether potential reductions in spending for overseas contingency operations (OCO), such as U.S. military operations in Afghanistan, can be considered as offsets to reductions in taxes or additional spending for Medicare or other programs. In this blog post, I will try to explain the issues involved.

One of the complexities is that those items fall in different budget categories. OCO spending is discretionary (that is, it comes from funding provided in annual appropriation acts, and in general appropriations have not yet been made for years beyond 2012); tax reductions affect revenues; and Medicare spending is mandatory (that is, the authority for the program comes from other kinds of laws, and its spending is governed by rules regarding benefits and eligibility that remain in place from year to year). Historically, Congressional budget enforcement procedures have dealt with these different categories separately.

Specifically, discretionary spending has been governed by allocations to the appropriations committees one year at a time and, currently, by caps on discretionary appropriations that are set through 2021. (Those caps, however, do not constrain funding for overseas contingency operations or certain other types of appropriations.) Revenues and mandatory spending, by contrast, have in recent years been subject to pay-as-you-go rules, which require a deficit-increasing change in either of those two categories to be offset by other changes within those two categories. So, CBO, in its cost estimates for legislation, has traditionally shown the legislation’s effects on discretionary spending separately from its effects on revenues and mandatory spending.

Another complexity is that there are laws in place that govern revenues and mandatory spending in future years, but OCO spending is set one year at a time and has only been provided through 2012. CBO, in its baseline projections for OCO spending, follows the rules set in law for projecting discretionary spending—that is, it projects appropriations in future years equal to those in the current year, with adjustments for inflation. But that is just a baseline projection; the funding has not yet been provided, and there is no “OCO fund” set aside in the Treasury from which resources can be drawn in future years.

If new legislation were to set caps on future appropriations for OCO, CBO would show how spending under those caps would compare with spending projected under baseline assumptions. That difference would not appear on a pay-as-you-go scorecard; nevertheless, lawmakers could judge whether that difference was more or less than the increases in the deficit that would stem from proposed increases in Medicare or other spending or proposed tax reductions.

Placing caps on appropriations for overseas contingency operations that are below the amounts in CBO’s baseline would result in estimated savings relative to those baseline projections. Such savings, however, might simply reflect policy decisions that have already been made and that would be realized even without such funding constraints. Moreover, if future policymakers believed that national security required appropriations above the capped levels, they would almost certainly provide emergency appropriations that would not, under current law, be counted against the caps.